Wednesday, 10 January 2018

Many economists have argued against undertaking austerity when
the UK’s borrowing rates were so low (at the zero lower bound of interest
rates). Austerity is all about getting the government deficit down in order to
reduce the amount of government borrowing. But why is austerity always framed
around government spending? Why are taxes, the other side of the deficit
equation, often ignored?

I think the main reason for this is that austerity within
the UK took the form of spending cuts rather than tax rises. Some people opposed
the UK’s austerity because of the fact that government spending is used as a tool
to redistribute to the poor. But what if, to reduce the deficit, taxes were levied
on the rich? One argument is that increasing taxes will reduce growth making it
harder to pay back the deficit. But this is precisely the same argument against
austerity: reducing government spending will reduce growth making it harder to
pay back the deficit.

There may be some reasons why cutting spending rather than
raising taxes may have less of an effect on growth. For example, some
governments may find it hard to raise revenue through taxation due to tax avoidance.
Tax changes may have more of an effect than government spending etc. Nevertheless,
there are clearly distributional concerns here which I do not think enough
economist at the time commented on: the concern seemed to be about the
aggregate management of the economy rather than the distributional implications
of the way austerity was being implemented.